A progressive tax is a tax rate that progresses or increases with an increase in the taxable income. It imposes a lower tax rate on the low-income earners and a higher tax rate on the ones that have a higher income. The government achieves this by making tax brackets that categorize taxpayers based on their income range.

The system of income tax in the United States is a popular progressive system. However, it is growing flatter in the current decades. For 2022 and 2023, there are seven different tax brackets, which have rates of 10%, 12%, 22%, 24%, 32%, 35%, and finally 37%. Back in 1985, there were a total of 16 tax brackets.

Key Takeaways

• A progressive tax is a type that imposes a higher rate of tax on individuals with higher incomes in comparison to the ones with lower incomes.

• A regressive tax, on the other hand, takes away a bigger percentage of income from the ones with a low income as compared to the ones with a high income.

• A sales tax, for instance, is a regressive tax.

• A flat tax is a type of single-income tax that applies to all types of taxable income, regardless of how much or how little.

• The Social Security payroll tax in the United States is a flat tax with an income cap.

Let Us Understand The Progressive Tax

The reasoning for progressive tax is that the flat percentage tax may end up being an inordinate burden on individuals who have low incomes. The dollar amount that is owed on it may be smaller, but the effect on its actual spending power is bigger.

The amount of how progressive a tax structure is solely depends on how much of the burden of tax is transferred to the higher income groups. If one tax code falls under the low rate of 10% and a higher rate of 30%, and another tax code has rates of tax that range from 10% to 80%, the latter will be considered more progressive.

Benefits Of Progressive Tax

On the good part, the system of progressive tax reduces the tax burden on people who are unable to or cannot afford to pay taxes. This leaves more money in their pockets. Then, they may afford to spend that money more on essential goods and stimulate the economy while doing so.

A progressive tax system may also collect more taxes in comparison to flat or regressive taxes. This is because the highest percentage of tax is collected from those with the highest income range.

A progressive tax also helps those with the biggest amount of resources to fund a better position of the services that every citizen and business depends on, like road maintenance or public safety.

Disadvantages Of Progressive Tax 

The progressive tax has critics who consider it to be a discouragement towards success. They also oppose the entire system as a way of income redistribution, which they think unfairly punishes the upper class, the wealthy, and even the middle class to some extent.

Those opposing the progressive tax typically are the supporters of low taxes and minimal government services.

How Does Progressive Tax Impact Workers? 

Progressive tax means that an individual will have to incur higher taxes if they are earning more. This becomes a negative incentive to work more. If an individual falls under the 12 percent tax bracket currently and would want to take up another job to earn a little more, they may just fall under the 22 percent tax bracket for earning extra. At the highest of the tax brackets, they would have to work more to achieve their earning goals after paying taxes.

Some of the progressive tax systems apply notably higher tax rates to individuals with higher incomes. The higher rates may also influence decisions on the different ways to lessen tax liability by increasing the deductions available and the credits or avoiding taxes in different other ways.

Progressive Tax Vs. Regressive Tax 

A regressive tax is just the opposite of a progressive tax. A regressive tax considers a bigger chunk of the disposable income from the ones that have low incomes compared to those with a higher income.

The sales tax, for instance, is a regressive tax. If two people, one with a higher income and the other with a low income, buy the same bag of groceries, both will pay the same amount of sales tax. But, the one with lower income will shell out a greater portion of their salary to be able to purchase the bag of groceries.

Progressive Tax Vs. Flat Tax

A flat income taxation system imposes the exact percentage of the rate of tax on everyone. Income does not play any role here. In the United States, the payroll tax that funds Social Security and Medicare is usually a consideration of the flat tax, as all the salary earners will have to pay the same percentage. However, in the case of Social Security, there is a cap on the tax.

For 2022, Social Security payroll tax was applicable only to earnings up to $147,000. For 2023, however, that number stands at $160,000. This makes flat tax available for everyone, but only till those levels.

The medicare tax applies to every level of income, and there is no wage cap involved either.

Is There A Way To Pay The Same Percentage Of Tax On Every Income?

This is not even hypothetically possible. With a progressive tax, you will only be paying the highest percentage on the part of your income that goes beyond the minimum threshold. For instance, if an individual made around $100,00 in 2022, they will fall under the 24% tax bracket.

However, only a part of their income, which will exceed the minimum threshold of the tax bracket of over $89,075, will fall under this tax rate. Therefore, the income will have a tax of 10% on the initial $10.275, then 12% on the money up to $41,775, and finally 22% on the income which touches $89,075. In this whole picture, only $10,925 will have a tax under the tax bracket of 24%.

The Bottom Line

A progressive tax is a type of tax that progresses or increases to higher rates of tax as the income of an individual increases. It means the ones with a low income will fall under lower tax obligations in comparison to the ones with higher incomes.

The progressive income tax in the United States involves tax brackets. Each of these tax brackets comes with their individual tax rates. While the rates of tax did not change from 2022 to 2023, the range of the income that the brackets cover increased to be able to reflect inflation.

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